A significant part of Canada's oil production is heavy oil coming from Alberta's oil sands. And it's no secret that many Canadian oil producers have been selling their heavy oil at a steep discount to WTI. Actually, Western Canadian Select (WCS) has been trading at an approximately $15/bbl discount to the WTI price while also trading at a discount to Maya, the Mexican oil of similar quality (API).
When it comes to the discount to Mexico's heavy oil, the key reason is that Mexico's heavy oil travels less distance to the Gulf of Mexico than Canada's heavy oil.
When it comes to the discount to WTI, the key reason is that there is limited pipeline capacity that can move oil out of Alberta, the main oil-producing Province in Canada. And this discount might widen in the next months because additional oil sands production enters the market from Suncor’s (SU) new Fort Hills mine and Canadian Natural Resources' (CNQ) expanded Horizon mine. To partly offset the limited pipeline capacity, the Canadian producers have been shipping significant oil volumes by rail over the last of years.
Unfortunately, things got worse for the Canadian producers a few weeks ago because TransCanada (TRP) scrapped the Energy East pipeline project aimed to ship oil to the Canadian East Coast, as illustrated below:
TransCanada pulled the plug because:
"Existing and likely future delays resulting from the regulatory process, the associated cost implications and the increasingly challenging issues and obstacles".
On top of this, Canada's Prime Minister Justin Trudeau imposed a ban on oil tanker traffic on the North Coast of British Columbia in 2015, effectively killing Enbridge's (ENB) Northern Gateway pipeline while he officially rejected plans for the pipeline in November 2016. The planned project consisted of two parallel pipelines between an inland terminal at Bruderheim, Alberta, and a marine terminal in Kitimat, British Columbia. Crude oil produced from oil sands would be transported from Bruderheim to Kitimat, while natural gas condensate would move in the opposite direction, as illustrated below:
Nevertheless, all hope is not lost. And the following pipeline projects can change Alberta's and Canada's oil industry for the better because they can significantly ease the current takeaway constraints by allowing more oil volumes to reach the U.S. Gulf Coast refiners:
1) TransCanada's Keystone XL: The project is illustrated below:
The Nebraska Public Service Commission approved this project through the state yesterday. However, this approval doesn't provide certainty that the project will ultimately be built because NSC voted for the alternate route (yellow color) and not for the company's preferred route (green color).
2) Enbridge's (ENB) Line 3: The project runs from Alberta to Superior, Wisconsin as illustrated below:
The project is currently undergoing a public hearing in Minnesota, and the Minnesota Public Utilities Commission is expected to rule on the adequacy of the project’s environmental impact statement this December, and on the certificate of need and route permits in the second quarter of 2018, which could clear the way for completion of the line a year later.
While construction is still awaiting the go-ahead from Minnesota, Enbridge's CEO said last September that the company is confident approval will be granted.
This project has an estimated capital cost of $5.3 billion in Canada and US$2.9 billion for the American stretch replacing the aging 1,660-kilometre pipeline running between Hardisty, Alberta and Superior, Wisconsin.
3) Kinder Morgan's (KMI) Trans Mountain Pipeline: The project is illustrated below:
Province of British Columbia stated its approval of the Project on January 11, 2017, with 37 conditions while Trans Mountain has made about 120 filings with the NEB with respect to the 157 federal conditions.
Despite this approval, the Trans Mountain expansion project is currently facing challenges primarily due to the City of Burnaby which hasn't yet granted the permits.
Also, it's noteworthy that this pipeline project has the added benefit of opening access to customers in Asia given that Canada currently is dependent on the U.S. with more than 95% of its oil exports going to its neighbor. As such, the potential expansion into new markets will give Canada a strategic advantage that mustn't be overlooked by the City of Burnaby during the decision-making process.
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